Charles A. Conant, Surplus Capital, and Economic Imperialism

The years shortly before and after 1900 proved to be the beginnings of the drive toward the establishment of a Federal Reserve System. It was also the origin of the gold-exchange standard, the fateful system imposed upon the world by the British in the 1920s and by the United States after World War II at Bretton Woods. Even more than the case of a gold standard with a central bank, the gold-exchange standard establishes a system, in the name of gold, which in reality manages to install coordinated international inflationary paper money. The idea was to replace a genuine gold standard, in which each country (or, domestically, each bank) maintains its reserves in gold, by a pseudo-gold standard in which the central bank of the client country maintains its reserves in some key or base currency, say pounds or dollars. Thus, during the 1920s, most countries maintained their reserves in pounds, and only Britain purported to redeem pounds in gold. This meant that these other countries were really on a pound rather than a gold standard, although they were able, at least temporarily, to acquire the prestige of gold. It also meant that when Britain inflated pounds, there was no danger of losing gold to these other countries, who, quite the contrary, happily inflated their own currencies on top of their expanding balances in pounds sterling. Thus, there was generated an unstable, inflationary system—all in the name of gold—in which client states pyramided their own inflation on top of Great Britain’s. The system was eventually bound to collapse, as did the gold-exchange standard in the Great Depression and Bretton Woods by the late 1960s. In addition, the close ties based on pounds and then dollars meant that the key or base country was able to exert a form of economic imperialism, joined by its common paper and pseudo-gold inflation, upon the client states using the key money.

By the late 1890s, groups of theoreticians in the United States were working on what would later be called the “Leninist” theory of capitalist imperialism. The theory was originated, not by Lenin but by advocates of imperialism, centering around such Morgan-oriented friends and brain trusters of Theodore Roosevelt as Henry Adams, Brooks Adams, Admiral Alfred T. Mahan, and Massachusetts Senator Henry Cabot Lodge. The idea was that capitalism in the developed countries was “overproducing,” not simply in the sense that more purchasing power was needed in recessions, but more deeply in that the rate of profit was therefore inevitably falling. The ever lower rate of profit from the “surplus capital” was in danger of crippling capitalism, except that salvation loomed in the form of foreign markets and especially foreign investments. New and expanded foreign markets would increase profits, at least temporarily, while investments in undeveloped countries would be bound to bring a high rate of profit. Hence, to save advanced capitalism, it was necessary for Western governments to engage in outright imperialist or neo-imperialist ventures, which would force other countries to open their markets for American products and would force open investment opportunities abroad.

Given this doctrine—based on the fallacious Ricardian view that the rate of profit is determined by the stock of capital investment, instead of by the time preferences of everyone in society— there was little for Lenin to change except to give an implicit moral condemnation instead of approval and to emphasize the necessarily temporary nature of the respite imperialism could furnish for capitalists.³¹

Charles Conant set forth the theory of surplus capital in his A History of Modern Banks of Issue (1896) and developed it in subsequent essays. The existence of fixed capital and modern technology, Conant claimed, invalidated Say’s Law and the concept of equilibrium, and led to chronic “oversavings,” which he defined as savings in excess of profitable investment outlets, in the developed Western capitalist world. Business cycles, opined Conant, were inherent in the unregulated activity of modern industrial capitalism. Hence the importance of government-encouraged monopolies and cartels to stabilize markets and the business cycle, and in particular the necessity of economic imperialism to force open profitable outlets abroad for American and other Western surplus capital.

The United States’s bold venture into an imperialist war against Spain in 1898 galvanized the energies of Conant and other theoreticians of imperialism. Conant responded with his call for imperialism in “The Economic Basis of Imperialism” in the September 1898 North American Review, and in other essays collected in The United States in the Orient: The Nature of the Economic Problem and published in 1900. S.J. Chapman, a distinguished British economist, accurately summarized Conant’s argument as follows: (1) “In all advanced countries there has been such excessive saving that no profitable investment for capital remains,” (2) since all countries do not practice a policy of commercial freedom, “America must be prepared to use force if necessary” to open up profitable investment outlets abroad, and (3) the United States possesses an advantage in the coming struggle, since the organization of many of its industries “in the form of trusts will assist it greatly in the fight for commercial supremacy.”³²

The war successfully won, Conant was particularly enthusiastic about the United States keeping the Philippines, the gateway to the great potential Asian market. The United States, he opined, should not be held back by “an abstract theory” to adopt “extreme conclusions” on applying the doctrines of the Founding Fathers on the importance of the consent of the governed. The Founding Fathers, he declared, surely meant that self-government could only apply to those competent to exercise it, a requirement that clearly did not apply to the backward people of the Philippines. After all, Conant wrote, “Only by the firm hand of the responsible governing races … can the assurance of uninterrupted progress be conveyed to the tropical and undeveloped countries.”³³

Conant also was bold enough to derive important domestic conclusions from his enthusiasm for imperialism. Domestic society, he claimed, would have to be transformed to make the nation as “efficient” as possible. Efficiency, in particular, meant centralized concentration of power. “Concentration of power, in order to permit prompt and efficient action, will be an almost essential factor in the struggle for world empire.” In particular, it was important for the United States to learn from the magnificent centralization of power and purpose in Czarist Russia. The government of the United States would require “a degree of harmony and symmetry which will permit the direction of the whole power of the state toward definite and intelligent policies.” The U.S. Constitution would have to be amended to permit a form of czarist absolutism, or at the very least an enormously expanded executive power in foreign affairs.³⁴

An interesting case study of business opinion energized and converted by the lure of imperialism was the Boston weekly, the U.S. Investor. Before the outbreak of war with Spain in 1898, the U.S. Investor denounced the idea of war as a disaster to business. But after the United States launched its war, and Commodore Dewey seized Manila Bay, the Investor totally changed its tune. Now it hailed the war as excellent for business, and as bringing about recovery from the previous recession. Soon the Investor was happily advocating a policy of “imperialism” to make U.S. prosperity permanent. Imperialism conveyed marvelous benefits to the country. At home, a big army and navy would be valuable in curbing the tendency of democracy to enjoy “a too great freedom from restraint, both of action and of thought.” The Investor added that “European experience demonstrates that the army and navy are admirably adopted to inculcate orderly habits of thought and action.”

But an even more important benefit from a policy of permanent imperialism is economic. To keep “capital … at work,” stern necessity requires that “an enlarged field for its product must be discovered.” Specifically, “a new field” had to be found for selling the growing flood of goods produced by the advanced nations, and for investment of their savings at profitable rates. The Investor exulted in the fact that this new “field lies ready for occupancy. It is to be found among the semi-civilized and barbarian races,” in particular the beckoning country of China.

Particularly interesting was the colloquy that ensued between the Investor, and the Springfield (Mass.) Republican, which still propounded the older theory of free trade and laissez-faire. The Republican asked why trade with undeveloped countries was not sufficient without burdening U.S. taxpayers with administrative and military overhead. The Republican also attacked the new theory of surplus capital, pointing out that only two or three years earlier, businessmen had been loudly calling for more European capital to be invested in American ventures.

To the first charge, the Investor fell back on “the experience of the race for, perhaps ninety centuries, [which] has been in the direction of foreign acquisitions as a means of national prosperity.” But, more practically, the Investor delighted over the goodies that imperialism would bring to American business in the way of government contracts and the governmental development of what would now be called the “infrastructure” of the colonies. Furthermore, as in Britain, a greatly expanded diplomatic service would provide “a new calling for our young men of education and ability.”

To the Republican’s second charge, on surplus capital, the Investor, like Conant, developed the idea of a new age that had just arrived in American affairs, an age of large-scale and hence overproduction, an age of a low rate of profit, and consequent formation of trusts in a quest for higher profits through suppression of competition. As the Investor put it, “The excess of capital has resulted in an unprofitable competition. To employ Franklin’s witticism, the owners of capital are of the opinion they must hang together or else they will all hang separately.” But while trusts may solve the problem of specific industries, they did not solve the great problem of a general “congestion of capital.” Indeed, wrote the Investor, “finding employment for capital … is now the greatest of all economic problems that confront us.”

To the Investor, the way out was clear:

[T]he logical path to be pursued is that of the development of the natural riches of the tropical countries. These countries are now peopled by races incapable on their own initiative of extracting its full riches from their own soil. … This will be attained in some cases by the mere stimulus of government and direction by men of the temperate zones; but it will be attained also by the application of modern machinery and methods of culture to the agricultural and mineral resources of the undeveloped countries.³⁵

By the spring of 1901, even the eminent economic theorist John Bates Clark of Columbia University was able to embrace the new creed. Reviewing pro-imperialist works by Conant, Brooks Adams, and the Reverend Josiah Strong in a single celebratory review in March 1901 in the Political Science Quarterly, Clark emphasized the importance of opening foreign markets and particularly of investing American capital “with an even larger and more permanent profit.”³⁶

J.B. Clark was not the only economist ready to join in apologia for the strong state. Throughout the land by the turn of the twentieth century, a legion of economists and other social scientists had arisen, many of them trained in graduate schools in Germany to learn of the virtues of the inductive method, the German Historical School, and a collectivist, organicist state.

Eager for positions and power commensurate with their graduate training, these new social scientists, in the name of professionalism and technical expertise, prepared to abandon the old laissez-faire creed and take their places as apologists and planners in a new, centrally planned state. Professor Edwin R.A. Seligman of Columbia University, of the prominent Wall Street investment banking family of J. and W. Seligman and Company, spoke for many of these social scientists when, in a presidential address before the American Economic Association in 1903, he hailed the “new industrial order.”³⁷ Seligman prophesied that in the new, twentieth century, the possession of economic knowledge would grant economists the power “to control … and mold” the material forces of progress. As the economist proved able to forecast more accurately, he would be installed as “the real philosopher of social life,” and the public would pay “deference to his views.”

In his 1899 presidential address, Yale President Arthur Twining Hadley also saw economists developing as society’s philosopher-kings. The most important application of economic knowledge, declared Hadley, was leadership in public life, becoming advisers and leaders of national policy. Hadley opined,

I believe that their [economists’] largest opportunity in the immediate future lies not in theories but in practice, not with students but with statesmen, not in the education of individual citizens, however widespread and salutary, but in the leadership of an organized body politic.³⁸

Hadley perceptively saw the executive branch of the government as particularly amenable to access of position and influence to economic advisers and planners. Previously, executives were hampered in seeking such expert counsel by the importance of political parties, their ideological commitments, and their mass base in the voting population. But now, fortunately, the growing municipal reform (soon to be called the Progressive) movement was taking power away from political parties and putting it into the hands of administrators and experts. The “increased centralization of administrative power [was giving] … the expert a fair chance.” And now, on the national scene, the new American leap into imperialism in war against Spain in 1898 galvanized opportunity for increased centralization, executive power, and therefore for administrative and expert planning. Even though Hadley declared himself personally opposed to imperialism, he urged economists to leap at this great opportunity for access to power.³⁹

The organized economic profession was not slow to grasp this new opportunity. Quickly, the executive and nominating committees of the American Economic Association (AEA) created a five-man special committee to organize and publish a volume on colonial finance. As Silva and Slaughter put it, this new, rapidly put-together volume permitted the AEA to show the power elite

how the new social science could serve the interests of those who made imperialism a national policy by offering technical solutions to the immediate fiscal problems of colonies as well as providing ideological justifications for acquiring them.⁴⁰

Chairman of the special committee was Professor Jeremiah W. Jenks of Cornell, the major economic adviser to New York Governor Theodore Roosevelt. Another member was Professor E.R.A. Seligman, another key adviser to Roosevelt. A third colleague was Dr. Albert Shaw, influential editor of the Review of Reviews, progressive reformer and social scientist, and longtime crony of Roosevelt’s. All three were longtime leaders of the American Economic Association. The other two, non-AEA leaders, on the committee were Edward R. Strobel, former assistant secretary of state and adviser to colonial governments, and Charles S. Hamlin, wealthy Boston lawyer and assistant secretary of the Treasury who had long been in the Morgan ambit, and whose wife was a member of the Pruyn family, longtime investors in two Morgan-dominated concerns: the New York Central Railroad and the Mutual Life Insurance Company of New York.

Essays in Colonial Finance, the volume quickly put together by these five leaders, tried to advise the United States how best to run its newly acquired empire. First, just as the British government insisted when the North American states were its colonies, the colonies should support their imperial government through taxation, whereas control should be tightly exercised by the United States imperial center. Second, the imperial center should build and maintain the economic infrastructure of the colony: canals, railroads, communications. Third, where—as was clearly anticipated—native labor is inefficient or incapable of management, the imperial government should import (white) labor from the imperial center. And, finally, as Silva and Slaughter put it,

the committee’s fiscal recommendations strongly intimated that trained economists were necessary for a successful empire. It was they who must make a thorough study of local conditions to determine the correct fiscal system, gather data, create the appropriate administrative design and perhaps even implement it. In this way, the committee seconded Hadley’s views in seeing as an opportunity for economists by identifying a large number of professional positions best filled by themselves.⁴¹

With the volume written, the AEA cast about for financial support for its publication and distribution. The point was not simply to obtain the financing, but to do so in such a way as to gain the imprimatur of leading members of the power elite on this bold move for power to economists as technocratic expert advisers and administrators in the imperial nation-state.

The American Economic Association found five wealthy businessmen to put up $125, two-fifths of the full cost of publishing Essays in Colonial Finance. By compiling the volume and then accepting corporate sponsors, several of whom had an economic stake in the new American empire, the AEA was signaling that the nation’s organized economists were (1) wholeheartedly in favor of the new American empire; and (2) willing and eager to play a strong role in advising and administering the empire, a role which they promptly and happily filled, as we shall see in the following section.

In view of the symbolic as well as practical role for the sponsors, a list of the five donors for the colonial finance volume is instructive. One was Isaac N. Seligman, head of the investment banking house of J. and W. Seligman and Company, a company with extensive overseas interests, especially in Latin America. Isaac’s brother, E.R.A. Seligman, was a member of the special committee on colonial finance and an author of one of the essays in the volume. Another was William E. Dodge, a partner of the copper mining firm of Phelps, Dodge, and Company and member of a powerful mining family allied to the Morgans. A third donor was Theodore Marburg, an economist who was vice president of the AEA at the time, and also an ardent advocate of imperialism as well as heir to a substantial American Tobacco Company fortune. Fourth was Thomas Shearman, a single-taxer and an attorney for powerful railroad magnate Jay Gould. And last but not least, Stuart Wood, a manufacturer who had a Ph.D. in economics and had been a vice president of the AEA.

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³¹ Indeed, the adoption of this theory of the alleged necessity for imperialism in the “later stages” of capitalism went precisely from pro-imperialists like the U.S. Investor, Charles A. Conant, and Brooks Adams in 1898–99, read and adopted by the Marxist H. Gaylord Wilshire in 1900–01, in turn read and adopted by the English left-liberal anti-imperialist John A. Hobson, who in turn influenced Lenin. See in particular Norman Etherington, Theories of Imperialism: War, Conquest, and Capital (Totowa, N.J.: Barnes and Noble, 1984). See also Etherington, “Reconsidering Theories of Imperialism,” History and Theory 21, no. 1 (1982): 1–36.

³² Review of Charles A. Conant’s The United States in the Orient, by S.J. Chapman in Economic Journal 2 (1901): 78. See Etherington, Theories of Imperialism, p. 24.

³³ David Healy, U.S. Expansionism: The Imperialist Urge in the 1890s (Madison: University of Wisconsin Press, 1970), pp. 200–01.

³⁴ Ibid., pp. 202–03.

³⁵The Investor, 19 January 1901, pp. 65–66, cited in Etherington, Theories of Imperialism, p. 17. Also ibid., pp. 7–23.

³⁶ Parrini and Sklar, “New Thinking,” p. 565, n. 16.

³⁷ Seligman was also related by marriage to the Loebs and to Paul Warburg of Kuhn, Loeb. Specifically, E.R.A. Seligman’s brother, Isaac N., was married to Guta Loeb, sister of Paul Warburg’s wife, Nina. See Stephen Birmingham, Our Crowd: The Jewish Families of New York (New York: Pocket Books, 1977), app.

³⁸ Quoted in Edward T. Silva and Sheila A. Slaughter, Serving Power: The Making of the Academic Social Science Expert (Westport, Conn.: Greenwood Press, 1984), p. 103.

³⁹ Ibid., pp. 120–21.

⁴⁰ Ibid., p. 133.

⁴¹ Ibid., p. 135. The volume in question is Essays in Colonial Finance (Publications of the American Economic Association, 3rd series, August 1900).